A Halloween Nightmare: No End to Litigation

Once upon a time there were several companies that were audited by our Department of Taxation. The companies and the Department didn’t agree on what was owed. They spent several years and millions of dollars in a heated court fight that went to the Supreme Court of Hawaii and went back down to the Tax Appeal Court, which then rendered a judgment to establish the amount of general excise taxes due for calendar years 2000 to 2011. The companies paid what was owed according to the judgment – about $30 million. But before the ink was dry on the judgment, the Department issued additional final assessments of the very same tax, namely general excise tax (GET), and for the very same years. And let’s just say that the additional final assessments were not for chump change.

“Do you have a problem with that?” the State said. “You didn’t file returns for those years, so we may assess additional GET at any time.”

“But you did that already.”

“That was for online hotel transactions. Now we are going to go after you for rental car transactions.”

“What about all the years we spent fighting in court over those years, and the final judgments entered by the courts?”

“That was for online hotel transactions. Now we are going to go after you for rental car transactions.”

Sadly, this is not a made-up Halloween story. This is a case now in the Hawaii Supreme Court called In the Matter of the Tax Appeal of Priceline.com, Inc., No. SCAP-17-0000367. One issue that the court will be considering is whether a court judgment on a tax type and year closes the door for that tax type and year.

The U.S. Supreme Court, when dealing with the income tax, has determined that income “taxes are levied on an annual basis. Each year is the origin of a new liability and of a separate cause of action. Thus, if a claim of liability or nonliability relating to a particular tax year is litigated, a judgment on the merits is res judicata [a ‘thing adjudicated,’ thereby closing the door] as to any subsequent proceeding involving the same claim and the same tax year.” Commissioner v. Sunnen, 333 U.S. 591 (1948).

Certainly, the GET and the federal income tax are two very different beasts. But they both call for annual returns, with the return of GET on Form G-49. Taxpayers are of course required to pay tax more frequently, typically monthly, to make sure that the government has a steady stream of money coming in the door. But the legally significant return is the annual G-49. The Sunnen case should be applied to the GET as well.

The Hawaii Supreme Court has recognized the same concept in a nontax context. In Kauhane v. Acutron Co., 71 Haw. 458 (1990), it said that the rule of res judicata “serves to relieve parties of the cost and vexation of multiple lawsuits, conserve judicial resources, and, by preventing inconsistent decisions, encourage reliance on adjudication. The res judicata doctrine thus furthers the interests of litigants, the judicial system and society by bringing an end to litigation where matters have already been tried and decided on the merits. It is a rule of fundamental and substantial justice, of public policy and private peace. The doctrine therefore permits every litigant to have an opportunity to try his case on the merits; but it also requires that he be limited to one such opportunity. Unsatisfied litigants have a remedy: they can appeal through available channels. But they cannot, even if the first suit may appear to have been decided wrongly, file new suits.”

Bringing an end to litigation is also eminently practical. If we allow our government to keep on bludgeoning our taxpayers with repetitive assessments, how can we expect those taxpayers to survive and generate the revenue the government needs?